Are you planning to retire with a pension? I’m sorry to hear that.
It is no big secret that states and municipalities across America are facing pension crises of varying degrees of severity. The fundamental cause of these crises: pensions assume that they will make far more money on their investments than they actually do. When they do not have an enormous rate of return on their investments, they end up short of money. They do not have all the money they promised to pay people when they retire. Hence, a crisis.
Of course, it is possible for reasonable people to argue endlessly over why pensions pretend that they will make more on their investments than they actually will. Sometimes it is sheer incompetence, or corruption, or mismanagement rooted in the self-serving nature of greedy politicians.. Other times it can be an honest mistake, driven by credulousness or by alluring and highly-paid consultants and money managers who promise the secret to high returns in exchange for hefty fees. Whatever the reasons, though, the situation becomes: pensions end up without enough money socked away to meet their obligations. This tends to cause them to reach for ever-more-exotic investments—hedge fund, private equity, etc.—in an effort to goose their returns. When this fails, they retreat back to earth.
Here is this week’s news from major pensions:
- The California State Teachers Retirement System, the nation’s second-largest public employee pension, earned just 1.4% last year. Its annual investment goal is a return of 7.5%.
- The nation’s largest public pension fund, Calpers, earned just 0.6% last year, compared with a target of 7.5%. “CalPERS’ average returns haven’t met investment targets over the last three years, five years, 10 years, 15 years or 20 years.”
Guess what: it’s hard to earn 7.5% a year these days. Many very smart people, in fact, believe that we are in what will be a long period of much lower investment returns, for a variety of macroeconomic reasons that we will not delve into in this blog post but about which you can read some very interesting books. Although the specific financial positions of major pension plans vary, it is hard to see how any major pension plan that is currently in a hole and planning to get out of that hole via unreasonably high investment return projections will ever manage to meet its obligations without at least one of the following:
- An enormous stock market miracle.
- A direct injection of cash into pension plans from a savior like the government, which is to say, some sort of bailout.
- A very large increase in pension contributions from workers, since their investment returns are going to be lower.
- Paying retirees less than they were promised.
We can’t have defined benefit pensions unless they are managed with scrupulous realism and they clearly are not being and have not been managed in that way! Can you even imagine the scale of the catastrophe when this slow-moving pension crisis hits the iceberg labeled “We Can’t Pay Your Pension?” It is going to be fucking enormous!!! You think people are mad about the class war now? Wait until hundreds of thousands of formerly middle class retirees start getting McDonald’s coupons as retirement checks and see what the fun-loving and unpredictable American voters do then! It will be something to behold I guarantee!
We need a well-funded Social Security program for everyone who needs it (and not those who don’t need it because they are wealthy). Existing pension plans can be strengthened to some extent by directing money towards them by squeezing those at the top of the ladder—but if the real problem is that we are living in a world of slower growth and lower returns, that is not going to be enough to make all of the promises come true. If you are currently looking forward to receiving a healthy pension upon retirement, you better be checking under the hood.